Abstract
This paper examines dynamic conditional correlations between 12 Chinese sectors and the S&P 500 index for the period of 2006–2014. We show that those correlations vary significantly across sectors and over time. Within the general equilibrium framework of Papanikolaou's (2011), we interpret the heterogeneity of sector-level correlations as arising from their heterogeneous sensitivities to investment-specific shocks. We also verify our interpretation and find that sector-specific investment opportunities are significantly associated with the magnitude of dynamic conditional correlations. This paper thereby advances our understanding of sectoral heterogeneities from the perspective of their responses to an outer shock.
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